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Canada’s Housing Market and Mortgage Outlook for August 2018

Canada’s Housing Market and Mortgage Outlook for August 2018

For the past year, the Canadian housing market has been the scene of endless speculation and a roller coaster of activity, from interest rate hikes to new legislation, all following an extended period of skyrocketing home prices.

Home resales in Canada were at a 6-year low in May, as even the Spring season failed to jumpstart the market, and many predictions have become slightly more negative since the beginning of the year, projecting that 2018 will be the first year since 2008 that house prices actually decline.

The end of 2017 marked the final spurt of home purchases as buyers rushed to get into the market before new mortgage rules kicked in January 1st of this year, at which point sales dropped more dramatically than most were predicting. It was clear that changes like the new stress test (see our article on the new mortgage rules) and B.C.’s Foreign Buyers Tax were starting to take effect, and even as the months rolled by, we continued to see subdued numbers across the country.

Only now is the dust starting to settle, and we’re far enough along to start looking at the rest of the year in fairly realistic terms. So what’s the outlook for the latter half of 2018?

Factors Driving Down Activity

As mentioned, new mortgage rules implemented at the start of the year have made houses less affordable for many buyers. Most notably, a new stress test for buyers putting 20% or more down requires them to qualify for the mortgage they want with a hypothetically high-interest rate (the higher of the Bank of Canada’s 5-year benchmark rate, or their contract mortgage rate plus 2%).

This is leading many potential buyers to look for lower-priced homes in order to qualify for a mortgage, and others are staying on the sidelines while they save up a larger down payment.

At the same time, many are reticent to commit to homeownership purely due to the uncertainty of the market. Especially in the first few months of the year, there was so much commotion, potential buyers weren’t sure where the market was headed, which prices were realistic, or whether or not they would be faced with higher interest rates in the short term.

It’s not just the typical homebuyer who has reason to hesitate in 2018. Other national and provincial regulations are suppressing activity in the form of foreign investment. For example, B.C.’s 15% Foreign Buyers tax was also implemented this January, and it seems to be curbing the rate at which homes are being purchased by non-residents for investment purposes. This means fewer bidding wars and an overall cooling of markets like Vancouver.

These factors certainly help explain the numbers we’ve been seeing so far this year, including a nearly 17% drop in home resales in February from the same month last year, but in order to gain perspective on the full situation, we also need to look at the upside.

Factors Driving up Activity:

In 2018, the millennial demographic is one of the largest in the Canadian population, and they’ve just reached peak home-buying age.

This means there are over 2.5 million people between the ages of 25 and 30, many of which are looking to purchase homes in the next few years. This is an important force combatting the downward pressures in the housing market today – it may not be easy to buy a home, but with so many millennials coming of age, they will find a way into the market.

It’s also important to note that there are a lot of new Canadian residents who are looking to buy. The influx of immigrants, especially in big cities, is helping to bolster real estate activity and will continue to do so as the year goes on.

I mentioned previously that new mortgage regulations have led to a reduction in activity around detached homes. This means that, for those who can withstand the stress test, it’ll be a bit easier to shop for a detached single-family home, but it also means that anyone who has been priced out by the stress test will be looking at lower-priced homes.

Activity around condos and townhomes is already increasing, and competition for those types of properties will be heightened in this environment.

A row of a new townhouses in Richmond, British Columbia

More broadly, however, most experts are anticipating that confidence levels will generally rise as time goes on. The effects of new regulations are playing out, the hottest markets in the country are cooling off, and as it becomes clear that we’re not in any kind of lasting economic tailspin, potential homeowners will start thinking more seriously about buying.

The Verdict

My verdict is that the next six months will not be nearly as dramatic as the last six.

With multiple factors working at once, most housing markets in Canada are already in a balanced state – even Toronto. This means that the number of new listings is generally keeping pace with the number of home sales.

Of course, only time will tell, but even though the reduction in home sales at the year’s outset was more prolonged than most anticipated, these numbers are already beginning to normalize and could level out significantly by the end of the year.

Let’s remember that the reason for all these changes was that Canadian household debt was remarkably high and runaway home prices were starting to make homeownership an impossibility for many Canadians. Overall, this correction should turn out to be a positive development for anyone in the market to buy a home and to carry an affordable mortgage.

Recommendations

With the new rules that the Government of Canada has put in place, you can’t take the chance that the person assigned to you by your bank has the experience or knowledge to get you approved. Even a slight error, or misunderstanding your family income can have a significant impact on your mortgage application, and even approval.

The risk is too high, reach out to a local ClearHome approved mortgage broker in your area and ensure you are dealing with an experienced mortgage broker.